Tax loopholes that enable corporations to deduct CEO pay in excess of $1 million could be costing American taxpayers hundreds of millions of dollars, according to a report released this week by Public Citizen.
In 2012, the 20 highest paid CEOs were paid base salaries totaling $28 million but received performance-based compensation totaling $738 million, Public Citizen discovered. For executive pay above $1 million, publicly traded companies may deduct only that which is based on performance or other incentives. If these companies paid the statutory 35 percent corporate income tax rate, their use of the performance-based compensation loophole for just those 20 CEOs cost American taxpayers $235 million.
“Especially during a long-term recession giving rise to major cuts in public services, and after American taxpayers bailed out Wall Street to the tune of trillions of dollars, it’s unconscionable that we continue to subsidize CEOs’ exorbitant salaries,” said Lisa Gilbert, director of Public Citizen’s Congress Watch division.
In 1993, when the CEO-to-median worker pay ratio was about 200-to-1, section 162(m) of the Internal Revenue Code was amended to limit publicly traded corporations from deducting more than $1 million in compensation. However, this amendment included a loophole that allowed corporations to continue to deduct certain types of executive pay. This loophole exempted compensation that is “payable solely on account of the attainment of one or more performance goals.”
After these changes took effect, corporations increased the use of performance-based pay, which remained tax deductible beyond the $1 million limit, assuming certain conditions are met.
Worse still, “performance-based” incentives sometimes only require achievement of routine goals or are arbitrary. For example, Robert A. Kotick, the CEO of Blizzard Activision Inc., could collect a cash bonus equal to 200 percent of his base salary if the company achieved only 75 percent of its target operating income.
There is a clear solution. Public Citizen urges Congress to pass S. 1476, the Stop Subsidizing Multi-Million Dollar Corporate Bonuses Act, introduced by U.S. Senators Jack Reed (D-R.I.) and Richard Blumenthal (D-Conn.). This bill would eliminate the tax exemption of commission-based pay, expand the universe of companies are covered by the provisions of 162(m), and – most important – eliminate the performance-based compensation exemption to the $1 million deductibility cap.
The report is available at https://www.citizen.org/ceo-pay-tax-loophole-report.